ForConstructionPros.com

It's not very often Uncle Sam provides us with a long-term tax program that benefits our industry. We did have the Bonus Depreciation program that provided a deferral for a couple of years. However, it is now generating tax problems because the deferral benefit is rolling over and the deferred taxes are coming due. (I'm sure many of you know what I mean.) There are some things a company can do to offset these excessive taxes, such as use tax-free exchange when selling equipment, but overall you have to pay the piper for benefits received previously.

That being said, the American Jobs Creation Act of 2004 introduced a Section 199 deduction for certain qualifying domestic production activities, which covers the activities of construction contractors, engineers and architects. The final regulations have been issued for this complex section of the code so contractors can now finalize their planning to obtain this deduction.

Free money?

What is the benefit of this deduction? Quite honestly, this is almost free money if you qualify, then do what is necessary to capture the information required to support your qualified efforts and the related deduction. The benefit is phased in from 2005 to 2010, with the deduction increasing from 3% to 9% of the lesser of Qualified Production Activity Income (QPAI) or Taxable Income. See below for your potential benefit assuming a QPAI of $1 million dollars:

Potential Deduction Savings

• 2005-'06 3% or $30,000 $10,500
• 2007-'09 6% or $60,000 $21,000
• 2010- 9% or $90,000 $31,500

Not bad for just taking the time to set up and understand the deduction. To make sure you understand how we arrived at these figures, the potential deduction was calculated using the $1 million qualified production activity income, which is basically the taxable profit from the activity calculated using the new regs.

Of course, there are deduction limitations in place. The deduction is calculated on the lesser of your QPAI or taxable income, and is also limited to 50% of W-2 wages. So, in short, you need to make the money and you need enough payroll to make it work.